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THE IMPORTANCE Of MODERN TRADE
AND THE STOPLER-SAMUELSON
THEORM IN TRADE AND WAGES DEBATE
Name: AHMED KADHUM JAWAD AL-SULTANI
M. Number: P89671
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In this paper, we try to investigate the effects of the Stolper-Samuelson theory, which uses the Heckscher-
Ohlin model to predict the strong relationship between the change in trade prices and non-consensual
wages in the United Kingdom and the United States. We conclude that, while increased trade with
developing countries has probably played some part in the widening wage inequalities in the UK and USA,
Our paper runs through the theory underlying this relationship, and shows how Stolper-Samuelson analysis
drastically altered economists’ perceptions of the determination of wages. If we accept the rather extreme
assumptions underlying the Stolper-Samuelson model, under which different countries’ products are
perfect substitutes for one another, relative wages at home are determined entirely by a combination of
world traded prices and the parameters of technology. Within certain bounds, changes in the supply of
skilled and unskilled labour or changes in taste of consumers will have no effect on wages. Our conclusions
are that there is still considerable uncertainty about what has driven the increase in wage inequality in the
Anglo-Saxon world. It seems likely that increasing imports from LDCs have played some part, but that the
predominant cause has been direct displacement of jobs within industries by new technology. The evidence
that differential technical progress in some industries compared to others is to blame is fairly weak. We
also conclude that, contrary to what Stolper-Samuelson might suggest, governments have considerable
power to mitigate rising wage differentials by use of education and training policy to increase workforce
skills. It is also possible that the specific problems of the UK and the USA may be in part a result of
macroeconomic policies over the past two decades: particularly of exchange rate instablility, which has
penalised manufacturers.
As the products of different countries are an ideal alternative to each other, relative wages at home are
fully determined by a combination of world prices and technology parameters. Within certain limits,
changes in the supply of passers-by or unskilled or changes in consumer taste will not have an impact on
wages. We show how this theory has been used in some studies to estimate the determinants of the
observed increase in inequality in the United States and the United Kingdom since the 1990s, using
Abstract
Introduction
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simplified models that reduce the analysis of Stolper and Samuelson into one equation. Which is
economically estimated. This empirical work generally indicates that the main driving force for
increasing inequality does not directly fall import prices from the Third World, but a related effect. The
rapid increase in productivity in developed countries in some high-tech sectors compared to the rest of
the economy led to a major change in the structure Production towards exporting high-tech goods and
importing unskilled manufactures. Moreover, the Stolper-Samuelson analysis leads to a worrying
conclusion that Western governments are practically able to counteract this effect. However, we then
present some recent work, based on the calibration of a full-year equilibrium model, with all the Stolper-
Samuelson analysis equations fully and appropriately adapted to the actual data. We prove that Stolper-
Samuelson's analysis is not consistent with what has already happened in the UK or the US, where large
changes in world prices or the rapid rise in productivity in high-tech industries would lead to the
complete destruction of the low-tech industry in the West. This has not happened in practice. Stolper-
Samuelson is based on very restrictive classical assumptions about the business of the economy: (a) a
very small world of goods produced, the ideal competition between and within countries, the full
movement of workers within countries (but without movement between countries) Full integration of all
goods. We demonstrate that the dilution of any of these assumptions largely removes the conclusions of
the Stolper-Samuelson theory and presents a series of general simulations of the balance in how some of
these assumptions affect outcomes, along with speculation about the effects of other assumptions. In this
paper, we summarize the theoretical implications of Stolper-Samuelson's theory and its role in this field.
And the discussion on the impact of increased imports from developing countries on unskilled wages in
developed countries. Our paper pass through And the theory behind this relationship, and shows how the
analysis conducted by Stolper and Samuelson has changed a lot of perceptions of economists on the
determination of wages.if we accept the extreme assumptions underlying the Stolper-Samuelson model.
Background
He referred to Stolber-Samuelson's theory of changes in the prices of trade liberalization to support the
idea that increased trade with developing countries had been a major cause of increasing inequality in
some developed countries (especially the United States and the United Kingdom) since 1979, Shown in
the table. 1
However, there are counter arguments:
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(i) The technical progress associated with the automation of the economy and the new economy can also
affect relative wages.
(ii) As the table shows, the increase in inequality is largely an Anglo-Saxon phenomenon.However,
Continental Europe has mostly experienced sharp rises in unemployment, leading Davis (1997) and
others to argue that they have suffered similar trade and/or technological shocks, but their inflexible
labour markets mean unemployment has risen rather than unskilled wages falling.
(iii) Most studies that" analyze "the marked change in inequality in the United States or the United
Kingdom - whether using a price-based approach or an alternative analysis of content - concluded that
technical change had a greater impact than trade. Nevertheless, there are still major systematic problems
in these works.
The Stolper-Samuelson Theorem a- Birth of a theorem
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According to Samuelson (1994), cooperation on Wolfgang Stolber's efforts to reconcile the new general
business theory with the work of former economists has arisen: "How can Haverler and Tosip be right in
the necessary damage to multi-factor factors such as the work of US tariffs, In the long run, free trade
will increase the demand for relative goods in the country, and thus divert labor to the labor market. To
local industries, where labor is more productive, and classical economists typically lack a single working
model or, equally, that production factors are used in varying proportions both within and between
industries, and in both cases, trade can not have redistribution effects within Although the teachers and
citizens of Samuelson recognized the impact of the change in the ratio of factors to income shares, their
analyzes were based on a partial equilibrium model of a protected industry. Goods from Supposed to be
the biggest. Thus, real wages were expected to rise, at least in terms of imported goods, and most likely
in general, although the impact would depend on the relative importance of exported goods exported in
total labor expenditures(1). . The General Trade Theory of the General Budget presented by Elie Hecker
and Beryl O'Haleen opened a new investigative line that focuses on differences in the intensity of relative
factors across industries and differences in the abundance of relative factors between countries.(2)
Stolber and Samuelson adopted this approach and adopted the standard Hachser-Ohlin terminology now
to refer to the proposition that "each country will export those goods that are produced by relatively
abundant production factors and will import those goods where relatively rare factors are important..
(1) Stolper and Samuelson provide illustrative quotations and references. One quote from Haberler rejects the possibility of
equalization of wages across countries unless labor is internationally mobile. As of 1941, Stolper and Samuelson agreed,
noting that “there will be a tendency—necessarily incomplete—toward an equalization of factor prices” due to trade. A few
years later, however, Samuelson (1948, 1949) would show that, under stipulated conditions, free trade alone is sufficient to
equalize factor prices. A footnote to Samuelson (1949) indicates that Abba Lerner presented essentially the same result in a
1933 paper prepared for a seminar at the London School of Economics. Perhaps due to Samuelson’s acknowledgment, the
paper was finally published as Lerner (1952). (2)Ohlin’s landmark treatise was published by Harvard University Press in 1933. The basic work by Heckscher and by his
student Ohlin had been available a decade earlier, but only in Swedish. Heckscher’s seminal 1919 article. .
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b-The Stolper-Samuelson analysis
Formalizing the logic of the Heckscher-Ohlin model, Stolper and Samuelson assumed two homogeneous
goods A and B, each produced under constant returns to scale using labor L and capital K, but with good
A using more capital relative to labor than good B. The two factors were assumed fixed in total supply
but freely mobile between the country’s two industries:
The two full-employment conditions together imply that the economy’s overall capital-labor ratio k can
be expressed as the weighted average of the capital-labor ratios A k and B k used in the two industries:
Factor mobility and perfect competition together imply that the equilibrium factor returns w and r are
equal across industries, and the return to each factor is equal to the value of its marginal product in that
industry:
The ratio of the marginal physical products of the two factors must therefore be equal across industries:
Stolper and Samuelson used an Edgeworth-Bowley box diagram to represent the model geometrically.
Each point in the box represents a feasible full-employment allocation of the factors between the two
industries.(3).
(3) This appears to be the first use of the Edgeworth-Bowley box to analyze efficient production—earlier uses of the
diagram had dealt with efficiency in exchange.
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Points along the contract curve indicate alternative efficient allocations of the two factors between
industries and thus alternative efficient output combinations for the economy, with a one-to-one
correspondence between points on the contract curve and points on the economy’s production possibility
frontier. At the corners of the box representing specialization in one of the two products, the capital-labor
ratio in the industry of specialization must equal the country’s overall capital-labor ratio. In between,
where both goods are produced, the capital-labor ratios in the two industries change systematically, with
both falling monotonically as the economy moves from production only of labor-intensive B toward
production only of capital-intensive A. as a consequence of the changing capital-labor ratios in the two
industries, the physical marginal product of labor must fall, and the physical marginal product of capital
must rise, in both industries as the economy produces more A and less B.The actual output combination
produced depends on the relative price PA/PS although their original motivation was to shed new light on
the effect of protection on wages, Stolper and Samuelson avoided further consideration of the details of
trade by focusing on the resulting.change in the domestic relative price of the goods.(4) .Their result is
thus applicable to a change in relative price that occurs for any other reason. Trade would reduce the
relative price of the import-competing good, which by the Heckscher-Ohlin theorem was assumed to be
labor-intensive B for the United States, a labor-scarce country.(5). The lower relative price of good B
would cause a shift in the economy’s production toward good A—a movement along the production
possibility frontier and the contract curve in the Edgeworth-Bowley box. If each industry were to use the
same factor proportions as before, the change in output mix would raise the country’s total demand for
capital and reduce its total demand for labor. Given fixed total factor supplies and full employment of
both factors before and after the rise in relative price of good A, the new output mix would thus be
feasible only if both industries were now to employ a lower capital-labor ratio, or equivalently, if there
was a rise in the rental-wage ratio facing the firms in both industries. These lower capital-labor ratios
imply a lower marginal physical product of labor in both industries and thus an unambiguously lower real
wage (and higher real rental) measured in terms of either good. This outcome is independent of the
pattern of consumption.
(4)Samuelson (1939) used the same simplification in examining a country’s gains from trade. (5)This was of course long prior to Leontief (1954) and illustrates the ready acceptance by international economists of the
empirical validity of the Heckscher-Ohlin theory.
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Wages, technology, endowments and trade in a competitive general equilibrium
In order to see how Stolper-Samuelson changes the determination of relative wages, we start by looking
briefly at general equilibrium in a closed but competitive economy.Production in industry i, Yi is a
function of technology, τ, and the employment of skilled and unskilled labour, Si and Ui:
ie Yi=Yi(τ,Si,Ui) (1)
Given competition, prices are equal to marginal cost (the zero profit condition), which is a function of
technology and factor wages:
P = C(τ,Ws, Wu) (2)
Relative wages are a function of relative employment of the two factors,
Ws/Wu = W(τ,Si/Ui) (3)
Factor markets are assumed to clear:
(4)
In the simplest case, where there is just one industry with a single representative firm, a rise in the relative
endowment of one factor can only affect wages through technical substitution in production(6).The only
factors which affect relative wages are endowments and factorbiased technical progress(7).Figure 1, below,
shows the relationship between endowments and wages in a two-good, two factor model, where industry 2
is more intensive in skilled labour S. The curves slope down, reflecting factor substitution within both
industries. However, There is now a possibility of substitution in consumption between the two
authorities, so debt default can have less impact on wages. The naive discontent shows the relationship
between waif and relative wages in this case. - With two commodities, wages can also be affected by
changes in tastes (the increasing rise in preference for skill-intensive good) or biased technological change
in the sector, which changes the relative production costs of goods. Whether relative height
(6)The relevant elasticity of substitution is usually assumed to be in the order of -1. (7)
Factor-biased change is where, at a given factor price, the amount of one factor used relative to anotherchanges.
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productivity in industry 2 benefits relative skilled wages depends on whether the increased consumer demand for good 2 outweighs the reduction in employment per unit of production - ie if the elasticity of substitution in consumption exceeds unity.
In figure 1, the relationship between endowments and wages in an open, H-O economy is shown by the
thick solid line. Comparison with dashed line for a closed economy shows that in the H-O case, rather
than producing both goods, and gradually shifting towards good 2 as relative skill endowments S/U rise,
the economy is now completely specialised in good 1 at skill endowments less than E* and completely
specialised in good 2 at skill endowments greater than E**. Between those two levels the country will
produce both goods, with both skilled and unskilled wages set on international markets at a wage ratio
W*, which is the wage ratio at which the two industries are equally profitable (given world prices and
technology).Points to note are:
1) Substitution in consumption plays no part in determining wages, output or employment in a small,
open H-O economy. Prices of the two goods are set on world markets and unaffected by patterns of
domestic demand.
2) Over the range E* to E**, changes in endowments do not affect relative wages. Outside that range,
the economy behaves like a single representative firm model.
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3) If the relative price of good 2 rises, the economy will switch to good 2 at a higher relative skilled
wage, say W’ on Fig 2.
On Figure 2, the sloping line AB shows the combination of relative wages which satisfies the two zero-
profit conditions (equation 2) simultaneously. In a closed economy, we can basically interpret prices as
being a function of wages (with some feedback via consumer preferences).
By contrast, in a small, open H-O economy, the causative direction is solely from (exogenous) world
prices to relative wages. Higher relative prices for good 2 mean higher skilled wages. However, this
Stolper-Samuelson relationship only holds between P* and P** - outside this range, the economy is
completely specialised in one good or another, and relative wages are determined by endowments and
technology of a single representative firm within the one industry in which the country is specialised.
Far from complete specialisation, say at P, a small change in endowments will not affect relative wages.
However, it does shift the range where the economy is not specialised, say to between P’ and P’’.Sector-
biased technical progress is very important. Assuming the country is not specialised, a 10% reduction in
the unit costs (at base wages) of producing good 1 has the same effects on shares of production,
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employment and relative wages as a 10 % rise in the price of good 1. By contrast, Haskel and Slaughter
(1998) point out that factor bias has little effect in this model.
Empirical application: single equation models
This work usually uses reduced econometric models derived from general equilibrium structures
Hachsher-Ohlin. Most concluded that the increase in wage inequality in the Organization for Economic
Co-operation and Development (OECD) was mainly the result of the skilled biased technical change, not
trade. While the authors directly refute the Hickerscher-Ohlin model as their justification, much
information is abandoned when the model falls into one equation. For example, an equation relating to
wage changes is estimated in price changes - but a simultaneous equation cannot be estimated in relation
to changes in output or labor. The above studies do not examine the effects of their estimated equations
for changes in output or labor versus actual observations. The important issue of full privatization is that
the models assume only one smooth relationship between prices and wages, rather than the opposite seen
in figure 2. For this reason, it is useful to compare these models in general terms Balance models,
calibration of actual data.
Empirical studies of a small, open economy: General Equilibrium models
In this section, we summarize the results of recent studies covering the analysis of changes in wages in
developed countries (mostly from the UK) to different causes, using H-O and a variety of other formulas
that investigate the effects of various new H-O assumptions. The models consist of a series of
simultaneous equations (mainly 1-4 above), calibration of simplified data in different countries. The
calibration can be one or two years. This is a double calibration technique described in Abrego and
Woolley. Basically, we need to assume the model- Structure and elasticity of substitution between factors
of production, in addition to a few other parameters in some of the changing models. Several studies
conducted by Abrego, Woolley, Edwards, and Woolley use a British database for the years 1979 and 1995
with the following main features:
1) A rise in the average skilled/unskilled earnings ratio from 1.22 to 1.58.
2) A rise in the skilled share of total employment from 52% to 41 %.
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3) A rise in output of skill-intensive goods by 36 % and a rise in output of unskilledintensive goods of 20
% from 1979-95.
4) A fall of 7.9% in the relative traded price of unskilled-intensive goods (derived from Neven and
Wyplosz).
The decomposition either by simulating the effect on the 1979 observations is made to change only one of
the standard price or appearance or technological variables to its 1995 value or bring about a change in a
series of small steps (effectively chain sequence - see Koz and Rizman (2000)). Summary of the basic
results processed in the table 2.
General equilibrium models of a small, open, Heckscher-Ohlin economy.
Perhaps the first general equilibrium study applied to the Organization for Economic Cooperation and
Development (OECD) recently was François and Nelson (1998), which views the United States of
America. In fact, this traditional starting point is traditional enlightenment (skillful and unskilled), a
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model consisting of two factors (skilled and unskilled), a model modified by the introduction of cross-
sectoral linkages, product differentiation in the Armington type, (Whether that is the difference between
the Krugman product) in the intensive and skilled sector. Its analysis focuses on the relative importance
of commercial relics under different model structures, a calibration of US data for 1995. The presence or
absence of "propagation" effects is observed (where changes in factor prices are amplified relative to
changes in product prices due to changes in demand for factors due to The changes in the sectoral output
and / or the absolute winner or the losers under the different models in which Francois and Nelson mimic
a default drop of 1 in the price of unskilled goodness find that magnification occurs only when the model
assumes that the goods are homogeneous, Form m With homogeneous goods, there are also distinct
winners and losers (skilled and unskilled workers, respectively). When commodities are distinct, the
zoom collapses and both workers can fully win from improved trade conditions. Abrego Wohley (2000)
uses the traditional H-O model with two factors (skilled and unskilled) and the Sultan (a convertible,
skilled, intensive and unskilled product) to analyze the change in wage inequality in the UK to trade and
technology components. They build the UK economy as a commodity price watchdog in global markets,
and take production factors fully across sectors, but not globally. Commercial shocks are shaped as
changes in relative global prices, and shocks technology as a sector Neutral technical change,
decomposed through the first separate solution to trade and technology shocks and then to both shocks,
allowing the separation of the contribution of each worker to increase wage inequality. Two main
findings are highlighted. First, there are in fact multi-form specifications of model 10 consistent with the
marked change in inequality in the UK, but each provides different decomposition results. Moreover,
trade for some specifications is the main source of change in inequality, while the main source is
technology for others. If the balance structure is not clearly defined, it is not possible to draw meaningful
conclusions from low-profile estimates.
Implications of Heckscher-Ohlin General Equilibrium studies
It is very difficult to reconcile observed changes in wages, prices, and outputs with a simple H-O model.
12. With regard to most reasonable flexibility assumptions, the H-O model is highly sensitive, given the
limited scope of the production function and even small changes in global prices tend to produce full
specialties. This is not what was observed in terms of output: for example, in the UK, while the output of
skill-intensive industries grew more than unskilled industries (36% versus 20% between 1979 and 1995)
Of the industrial sector, which was expended by changing the price of HO. As a result, the only equation
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that has been reduced in the section above should probably be. (3) is considered an ad hoc experimental
declines, not as applications to a core model of the organization. This is important because, in most
models other than the strict H-O formula, relative factors play an important role, yet trade-based literature
has completely ignored these problems. Given practical problems with the simple H-O model, it is worth
considering the impact of other model structures on trade, technology, endowments, and wages.
The labour economics literature affect biased technological change, changes in skills, laws and bargaining
as the main determinants of inequality. By contrast, commercial factors in the Hecker-Ohlen-Samuelson
literature and business factors, in the form of changes in global prices, changes in openness to trade
policies and neutral sector-wide technological change are all important factors. This suggests that the
explanation for increases in inequality in the UK and the US is due either to increased access to imports
from developing countries or through technological improvements that lead to increase commercialization
of skill-intensive products. No single country is likely to affect workers' wages. While experimental
research based on single-equation models found evidence of the "Stolper-Samuelson effects" of
globalization, the general balancing work shows that these observed results do not, in fact, correspond to
the H-O model. Indeed, this model involves very rapid changes in customization in response to either
price or technological shocks, so that the economy quickly reaches full privatization: therefore, the
changes observed in practice are much more.Matches modified templates. We are studying general
equilibrium studies by Abrego Endolley, Edwards and Wohley based on the mitigation of various H-O
assumptions (permitting distinct goods, wage equalization, fixed factors and/or mobility). - This suggests
that the results of literature H-O must be taken with caution. Indeed, most alternatives examine the
direction of trade effects on wages implicitly Stolper-Samuelson, namely that unskilled wages in
developed countries will decline in the face of trade liberalization but greatly reduce the magnitude of this
effect. However,The multi-faceted version of the Hecker-Ohlin model makes the linkage between trade in
developing countries and wages in developed countries more active and fragile. In light of this, we
propose that studies on the regression of the single equation be considered primarily as ad hoc empirical
studies, rather than as direct attempts to estimate the H-O economy. Despite its implicit conclusions about
the effects of Stoller-Samuelson's wage trade, which was a contributing factor, it is probably not the main
factor. It is generally consistent with some of the general equilibrium structures that we have discussed.
Summary and Conclusions
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There are important caveats. In particular, studies Of this type should not rule out that these factors have
had an important impact on relative wages (despite some simpler HO models suggested). We also believe
that there is a strong argument for further investigation into general equilibrium disassembly operations,
expansion of the analysis to include multi-country multi-country models and the effects of various market
structures. New business theory may be important- Long-term effects of deviation and policy, should be
investigated as well.
1- Abrego, L. and J. Whalley (2000), “The Choice of Structural Model in Trade-Wages Decompositions.”
Review of International Economics, Vol. 9, No. 3 (August).
2- Borjas, G.J., Freeman, R.B., and L.F. Katz (1992): “On the Labour Market Implications of Immigration
and Trade”, in G.Borjas and R.Freeman,(eds) Immigration and the Work Force. Chicago, University of
Chicago Press, pp 213-44.
3-Francois, F. and D. Nelson (1998), “Trade, Technology and Wages: General Equilibrium Mechanics,”
Economic Journal 108: 1483-1499.
4-Krugman, P. (2000), “Technology, Trade and Factor Prices” Journal of International Economics
50: 51-71.
5-Machin, S. and J. van Reenen (1998), “Technology and Changes in Skill Structure:Evidence from Seven
OECD Countries.” Quarterly Journal of Economics 113: 1215-44.
6-Samuelson, Paul A. 1994. “Tribute to Wolfgang Stolper on the Fiftieth Anniversary of the Stolper-
Samuelson Theorem,” in Deardorff and Stern, eds. (1994), 339-342.
7- Stolper, W. and P. Samuelson (1941),“Protection and real wages”, Review of Economic Studies 9: 58-73.
Sources
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